AUSTIN – The Texas Supreme Court continued its deference to the plain language in a contract, but only by a narrow majority, as it rejected a $27.7 million verdict in a dispute involving an oil and gas “farmout” agreement.
The court split 5-4 on the issue of whether industry custom and use should be considered in interpreting the contract, with five justices rejecting industry norms when they conflict with a written contract.
Justice Eva Guzman, in a strongly worded dissent, accused the majority of ignoring “a centuries-old practice firmly rooted in our jurisprudence, recognized by learned treatises, and applicable to commercial contracts nationwide, including in Texas.”
Barrow-Shaver Resources Co. won the verdict from a Smith County jury against Carrizo Oil & Gas, which had demanded $5 million to sign off on a $27.7 million deal with Raptor Petroleum. The verdict was overturned by the Seventh Court of Appeals in Amarillo.
Carrizo was the only one of 32 affected parties that refused to sign off on the deal assigning development rights over 22,000 acres in North Texas’s Caddo Arch Bend. After drilling $22 million worth of dry holes in 2011, Barrow-Shaver had jumped at Raptor’s offer. When the deal fell through Barrow-Shaver sued Carrizo for contract breach and fraud.
Carrizo held their interest under a farmout agreement. A farmout agreement is a contract between a working-interest owner and a drilling operator with no interest in the minerals until it completes its services under the agreement.
At trial, Barrow-Shaver and Carrizo agreed that the contract allowed Carrizo to block the sale but differed on whether doing so was customary in the oil and gas. The jury heard conflicting expert testimony on that…
Source: FuelFix
